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The US dollar held steady near its highest level in two weeks during trading on Wednesday, as investors awaited the US Federal Reserve’s decision on interest rates, while the New Zealand dollar came under strong pressure after the central bank in New Zealand kept interest rates unchanged, contrary to the expectations of most economists.
The dollar index, which measures the performance of the US currency against a basket of six major currencies, stood at around 102.40 points , while the euro remained stable at $1.1124 , and the British pound fell by about 0.1% to $1.3295 . The dollar traded relatively quietly against the Japanese yen, hovering around the 157.95 yen level.
New Zealand dollar falls after surprise decision
The most notable move in the currency market was by the New Zealand dollar, which fell as much as 1.7% to US$0.5583 , after the Reserve Bank of New Zealand decided to hold interest rates steady at 2.75% , even though 22 out of 27 economists surveyed by Reuters had predicted a rate hike.
But the currency pared some of its losses after Bank Governor Anna Breymann indicated that the monetary policy committee expects further interest rate hikes at upcoming meetings, possibly at higher levels than it indicated in September.
Analysts believe the bank hasn’t necessarily abandoned its monetary tightening policy, but may have simply postponed raising interest rates. However, the weak economic outlook and the possibility that markets have overestimated the rate hike could continue to put pressure on the New Zealand dollar.
The US Federal Reserve: All eyes on December
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All eyes are on the US Federal Reserve’s decision, amid widespread expectations that interest rates will remain unchanged.
Interest rate futures pricing indicates a probability of approximately 91% for interest rates to remain unchanged at the current meeting.
But the importance of the decision is not limited to what the bank will announce today; investors are also focusing on the monetary policy statement and remarks by Federal Reserve Chairman Kevin Warsh, looking for clues about the next move in December.
Analysts suggest that the Fed does not need to raise interest rates at the current meeting to move the markets; a change in investors’ expectations regarding the possibility of a rate hike in December may be enough to support the dollar and increase market volatility.
The yield on 10-year US Treasury bonds was around 5.01% , a level that investors monitor to assess interest rate expectations and the attractiveness of dollar-denominated assets.
Australian dollar and inflation: A key meeting next week
The Australian dollar rose by about 0.1% to US$0.7035 , after data showed inflation in Australia accelerated to 1.3% during the third quarter, compared to 0.6% in the previous quarter.
Core inflation, measured by the scaled average, was 1% during the quarter, while the annual rate was 3.6%, which is higher than the central bank’s target.
These figures present the Reserve Bank of Australia with a crucial decision at its meeting next week, as officials assess whether the four interest rate hikes implemented this year have been sufficient to bring inflation back to target. Some analysts expect the bank’s team to recommend another rate increase.
Bank of Canada and the Israeli shekel under pressure
In Canada, the US dollar rose about 0.1% to 1.4063 Canadian dollars ahead of the Bank of Canada’s interest rate decision. Market pricing suggests a roughly 77% probability of a 25-basis-point rate hike, a preemptive move to prevent the impact of rising energy prices from spreading to the rest of the economy, although a Reuters poll showed economists divided on this likelihood.
In Israel, the shekel fell by about 1% as political uncertainty mounted, after exit polls indicated a possible political stalemate and difficulty in forming a government.
In the cryptocurrency market, Bitcoin rose by about 0.4% to $81,062 , and Ethereum climbed by about 0.8% to $2,361 .
Currency markets are currently moving in response to the divergence in interest rate expectations among central banks. The Federal Reserve’s December decision and statements remain the most important factor for the dollar, while the Bank of New Zealand’s decision demonstrated that markets can experience sharp movements when central bank decisions differ from investor expectations. Meanwhile, inflation data and interest rate decisions in Australia and Canada will continue to influence currency trends in the coming days.
